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January 26, 2017

Why President Trump Is Wrong about Trans-Pacific Partnership Agreement

On Monday, President Trump made good on one of his signature campaign promises and notified the other twelve countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) considering ratifying the Trans-Pacific Partnership (TPP) Agreement that the United States was withdrawing from the treaty and he would not ask Congress to ratify it. The President's stated reasons for doing so, reiterated many times last year, was that the treaty was bad for American workers and part of a pattern of trade agreements that had taken jobs from U.S. workers and encouraged businesses to offshore capital and production capacity in favor of countries where labor was cheaper than in the U.S.

Regardless of whether these arguments have merit, the President was wrong to withdraw from the TPP, which was generally favorable to American interests and would have had no effect on the U.S. job market. This is because the provisions of the treaty favored American innovators, specifically biotechnology and pharmaceutical companies but all creative industries (including film, recording artists, and writers, among others) whose efforts are not offshored. Indeed, as the U.S. Trade Representative has documented in his Special 301 Report every year (see "U.S. Trade Representative Issues 2016 Special 301 Report"), counterfeiting of creative works (videos, phonorecords and CDs, videogames, feature films, and the like) work a considerable hardship on creative companies in the U.S. that employ millions of workers. These folks are not just the creative talent (with whom the President may have a contentious relationship) but all the grips, camera operators, electricians, special effects people, and others that are listed seemingly ad infinitum at the end of every movie, even ones without apparent special effects. It also includes all the support staff, caterers, tutors for young actors, crowd control people, and even lawyers involved in the creative process. Counterfeiting is a global problem and the TPP, like most trade agreements, either contained provisions directed at limiting the effects of such counterfeiting or set out a framework for signatory countries to do so.

For pharmaceuticals, similar albeit more pernicious consequences can be expected to arise from the President's decision. Pharmaceutical companies act from a global perspective, so that events happening abroad influence their strategies worldwide. There are two possible outcomes for the TPP now that the U.S. has withdrawn. The first is that the remaining countries fail to ratify the agreement (or that the number who do fall under the requirement that signatories make up 34% of global GDP) and the status quo remains. But that status quo is that there is no market exclusivity for biologic drugs in many of these countries. Accordingly, U.S. biopharma companies will need to rely on patent protection and enforcement country-by-country to protect their investment in providing drugs to these countries. This is a much more expensive proposition that the regulatory exclusivity (a minimum of 8 years of market exclusivity) provided for in the TPP. Without this protection, provided by signatory governments preventing biosimilar drugs to be marketed until the exclusivity term expired, biosimilar competition will be immediate, or as soon as possible. Companies like Samsung's Bioepsis biosimilar subsidiary, and others, can be expected to enter the biosimilar market as soon as their development pathway will allow. Alternatively, the remaining countries may still ratify the treaty; in that case the benefits to biopharma companies in those countries would still accrue. But if the TPP is ratified in the remaining countries, it may behoove U.S. biologic drug companies to partner with or resource their biologic drug production to an affiliate in a TPP country in order to reap the 8-year market exclusivity benefits under the treaty. This will not improve prospects for jobs in the U.S. or bring jobs home; indeed, it will reduce the need to produce in the U.S. these drugs for sale in the TPP countries.

Another possibility is that China (which has voiced an interest in being involved in the agreement) may ask to be allowed to enter the TPP and in America's absence it will be the Chinese and not the Americans that will be the dominant power among TPP countries. This is unlikely to inure to our benefit and while consistent with a broad retrenchment into a more isolationist, "America First" stance such an outcome will mean that Chinese (or Indian, or Russian, or Brazilian) interests rather than American interests will be at the global forefront.

The fact is that economic realities are what is behind American job loss. This happens for reasons that know no national borders, such as automation, which has taken jobs from automobile and other factory workers worldwide. There are also national and regional effects, such as the cheaper costs of manual labor and disregard for proscriptions against child labor in some countries, factors against which Americans are unlikely to be prepared to compete. American influence, such as the pressure put on companies like Apple and Nike, can have some effect in ameliorating the extent to which practices like child labor are utilized. But this influence is diminished not strengthened by an American abandonment of its leadership role in the world.

The Trump administration has plans to "renegotiate" the North American Free Trade Agreement (NAFTA), despite indications that the treaty has been a net positive for the U.S. economy. We may also expect that other trade agreements, like the Trans-Atlantic Trade and Investment Partnership (TTIP) and the Trade in Services Agreement (TiSA), are also at risk. It is logical to expect such an outcome, insofar as you cannot have an international trade agreement based on an "America First" policy; other countries are unlikely to agree to the kind of one-sided agreement this would require. Like President Bush's "Coalition of the Willing" during the Iraq War, only those countries dependent on the U.S. would agree to be involved and those are not our most profitable trading partners.

The fact is that global economics preclude the kind of repatriation of certain jobs to the U.S. that is the basis for the President's policies. America's advantage with regard to the rest of the world rests on the stability of our institutions and the creativity of our people. The TPP promoted our creative advantage, but the isolationist policies behind our withdrawal do nothing to expand American competitiveness and influence in the world. Withdrawal from the TPP was a mistake, and one we will likely come to regret when none of the purported benefits of walking away from the treaty come to pass.

Your points about TPP are well-taken, but I also understand the Trump administration's view that these multi-national treaties don't always favor certain aspects of the American economy. Also, if I recall correctly, there was a push on by several countries to decrease the length of time for biosimilar exclusivity that the Obama administration was more than happy to agree to, but, for example, Senator Hatch was not. And NAFTA does have some downsides for certain American industries, especially when you take into account the corporate tax structure in the US.

Perhaps you are totally correct. Nevertheless, in political messages, it's important not to get too bogged down by the details. Details never bothered Joe Biden in discussing his life story, or Mark Lemley talking about the inventors of the transistor. Trump is sending a message to voters in Michigan, Pennsylvania, and West Virginia that he is doing something about their problems. Adam Smith might disagree about the wisdom.

Well, Lawrence, I understand the political power of this meme. But I also think chickens have a nasty habit of coming home and when strawberries cost $18 dollars instead of $3 due to the President's tariffs I can't expect those Michigan, Pennsylvania or West Virginia voters will be happy. To say nothing of the jobs that are not coming back. Funding educational training (carpentry, plumbing, electrical, computers, etc.) outside traditional college education would be a more productive way to address the issue.

Dear Skeptical: you confuse the process with the outcome. Regardless of anyone's political misgivings about the secrecy with which the treaty was drafted, the actual document was a net plus for biotech/pharma in the signatory countries. As well as all the creative arts folks. I can't damn the treaty because I don't like how it was created; the drafters felt they wouldn't be able to get it done with the world looking over their shoulders.

But don't worry - the great thing about these experiments in government action is that we will find out whether we regret withdrawal or not.

Your points are well taken. The TPP was a the subject of controversy and debate here in New Zealand as well, but interestingly for the reason that it was too much in favour of American interests. This just highlights that any free trade agreement requires compromise from both sides.

I seriously doubt the TPP in its current form will be ratified. Heads of various of the governments including NZ and Japan have admitted as much. Which as you say, leaves it open for China to expand its interests in the Asia Pacific region. Somewhat ironically in a historical context, President Xi seems to be setting China up as a champion of free trade.

New Zealand already has a free trade agreement with China and China is our largest trading partner. No free trade agreement exists with the US even though most would see New Zealand as being more aligned with US interests. With ties to China getting closer and closer all around the region, the US may have lost its last opportunity to be a leader and influence policy in the region.